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Cablegate: Brazil: Small Victory in the 40 Year Struggle for a Btt

VZCZCXRO3248
RR RUEHRG
DE RUEHBR #1271/01 3020953
ZNR UUUUU ZZH
R 290953Z OCT 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 5296
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 8324
RUEHSO/AMCONSUL SAO PAULO 0014
RUEHRG/AMCONSUL RECIFE 0056
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 001271

SENSITIVE BUT UNCLASSIFIED
SIPDIS

STATE FOR WHA/BSC, WHA/EPSC, EEB/OMA SAUNDERS
TREASURY FOR LUYEN TRAN MICHAEL MUNDACA
COMMERCE FOR ANNE DRISCOLL LORRIE FUSSELL

E.O. 12958: N/A
TAGS: EFIN ECON EINV BR
SUBJECT: BRAZIL: SMALL VICTORY IN THE 40 YEAR STRUGGLE FOR A BTT

REFS: A) BRASILIA 828 B) BRASILIA 890

1. (SBU) Summary: On October 28, the Brazilian Chamber of Deputies'
Constitutional Committee (CCJ) approved the Tax Information and
Exchange Act (TIEA) with the United States. The TIEA, which the
Government of Brazil (GOB) considers an important pre-element of
progress toward a Bilateral Tax Treaty (BTT), is now cleared to
advance to deliberation and a vote in the full Chamber. On October
27, panelists in a United States-Brazil BTT conference hosted at the
Chamber of Deputies predicted the positive CCJ result, yet did not
seriously address the key issues, such as tax sparing, dispute
resolution, and transfer pricing, that remain fundamental to
achievement of a United States-Brazil BTT. End Summary.

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BTT CONFERENCE
--------------

2. (SBU) The Chamber of Deputies, AMCHAM, the Brazil-U.S. Business
Council and CNI (National Confederation of Industry) co-hosted a
United States-Brazil Bilateral Tax Treaty conference on October 27.
Panelists, including U.S. business representatives, Brazilian
business representatives, Members of Congress and the Brazilian
executive branch, were supportive of renewed progress on a United
States-Brazil BTT. The level and tone of support ranged from a
reserved theoretical "in favor" stance from Receita Federal
(Brazil's IRS-equivalent agency), to more adamant calls for
immediate action from AMCHAM which openly questioned GOB resolve to
move the issue forward.

3. (SBU) Marcos Valadao, Receita's lead international tax
negotiator, delivered prepared remarks highlighting the standard
benefits of a BTT. In order to solve the 40 plus year impasse,
Valadao recommended pursuing a United Nations model treaty, versus
the United States preferred OECD model (NOTE: Valadao presumably
believes the U.N. model would be more favorable to Receita's tax
collections, given the model's consideration of special
circumstances of developing countries. The U.N. model also promotes
tax sparing, which Valadao should realize is a non-starter with the
U.S. Congress (reftel B). END NOTE). Valadao argued that tax
sparing continues to be a major impediment to a treaty. He also
contended that there is no empirical evidence to indicate a
relationship between investment flows and the existence of a BTT.

4. (SBU) Robert Pasqualin, AMCHAM's legal counsel and president of
the AMCHAM Tax Taskforce, confronted Valadao's
less-than-enthusiastic acknowledgement of the importance of a BTT,
with a strong criticism of Brazil's tax system. Speaking directly
after Valadao, he said, "Brazil's tax system is already too complex
and seriously flawed. The absence of a solid BTT with the United
States just makes it worse." He then cited a study showing
Brazilian companies pay more in taxes than on employee's salaries
and wages. Pasqualin suggested the GOB may not have the resolve to
move forward on a BTT with the United States, asking, "Don't we know
how to produce a BTT, or do we not want to?" He encouraged the GOB
to strive for specific progress, and volunteered AMCHAM's full
cooperation with Receita to assist, adding that he has personally
offered support to Valadao in the past.

5. (SBU) In addition to Valadao and Pasqualin's presentations, a
series of panelists spoke in favor of a BTT. Luis Balduino, the
Ministry of Exterior Relations head of international financial
policy, cited political and diplomatic resolve on the part of the
GOB to move forward with a BTT. Brazilian member of congress,
Mendes Thame (PSDB-SP) also spoke in favor and predicted the October
28 CCJ approval of the TIEA. EMBRAER's Director of Institutional
Relations, Horacio Mello, compared Brazil's lack of a BTT with the
United States to an American trying to rent a car without a credit
card, "The U.S. financial system looks upon such a transaction with
suspicion; the Americans view the absence of a BTT in the same
light."

6. (SBU) Brazilian member of congress, Mauricio Rands (PT-PE),
co-chair of the Brazil-U.S. Parliamentary group, announced that
several members of congress will be presenting in the coming days a
petition in the Foreign Affairs Committee that will request
acceleration on the BTT from Casa Civil. He asserted that there was
a strong awareness among the Brazilian congress of the importance of
signing a BTT with the United States.

TIEA ADVANCES
-------------

7. (SBU) As panelists had predicted, on October 28, the Brazilian
Chamber of Deputies' Constitutional Committee (CCJ) approved the

BRASILIA 00001271 002 OF 002


TIEA with the United States. The TIEA, which the GOB considers an
important pre-element of progress toward a BTT, is now cleared to be
sent next week to the full Chamber for deliberation under a special
"urgency" procedure. This should help the TIEA's prospects for
passage. While the Chamber's vote is uncertain, there is a good
basis for believing it will approve the TIEA given the CCJ's October
28 recommendation. If the Chamber approves, the TIEA goes to the
Senate, where prospects become more difficult to predict. While the
Senate is likely to receive the TIEA in late November or December,
there is no sense at this stage either when the Senate may vote or
what the outcome of its vote will be.

8. (SBU) Comment: The Chamber BTT conference, similar to the
CNI-sponsored event in June (reftel A), highlighted broad support
for progress on a United States-Brazil BTT. This particular event
was significant in that it included Brazilian members of congress
and GOB officials voicing support for a BTT. While no party voiced
objection to progress on a BTT, Valadao did little to convince the
conference attendees that Receita is a motivated negotiator. The
U.S.-Brazil CEO Forum commissioned study on the effects of a BTT for
Brazil is now finished, and will be formally presented to the GOB
within the next three weeks. The October 28 CCJ committee approval
of the TIEA is a step in the right direction, yet significant
hurdles remain (reftel B) including: tax sparing, dispute
resolution, and transfer pricing; hurdles that were barely, it at
all mentioned, during the BTT conference. End Comment.

KUBISKE

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